Has Twitter Failed, or Is There Reason for Hope?

By Markets Fool.com

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An analyst at MoffettNathanson recently issued a troubling critique of Twitter and simultaneously downgraded the stock to sell.

The title of the note leaves little ambiguity about where it stands: "Hope Is Not a Strategy."

It quickly led to grim headlines, including one from Barron's that declared that "Twitter Has Failed."

Is Twitter in as much trouble as MoffettNathanson would have us believe? Or is there reason for investors to believe things will soon start to turn?

Even taking a long-term view on the company, it's tough to rebut the firm's critique.

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The digital advertising market is growing, but it is also uber-competitive. Facebook and Alphabet have emerged as the dominant players and seem to be only strengthening their positions.

At the same time, promising new platforms like Snapchat and Pinterest are emerging, finding niches within the digital ad world and leaving even less room for Twitter.

The crux of MoffettNathanson's critique is that advertisers have grown "fatigued" with Twitter's platform, and that the competition is simply too formidable for Twitter to change that in a meaningful way anytime soon.

The analyst said it sees "no compelling reason" to own the stock, other than the possibility that it may be acquired.

"In addition, we don't think management grasps the urgency of its situation," wrote analyst Michael Nathanson, "and seems content to pat itself on the back for continually beating self-generated bottom line forecasts."

Investors growing uneasy

Twitter CEO Jack Dorsey has again called for patience from investors. In a letter to shareholders last month, the company touted "a strong product roadmap" and said it plans to unveil new features for advertisers later this year, including better targeting and verification.

As investors, we never want to be short-sighted. But Twitter has done little to instill confidence.

This is far from the first piece of evidence of the company's struggles. Surveys of advertisers have shown frustration with the platform for some time already. Just 4% of those surveyed by eMarketer last year indicated plans to increase spending on the platform.

It's not a surprise then that eMarketer recently lowered its expectations for Twitter, saying its forecast for 2016 revenue of $2.95 billion was too high and setting a new expectation of $2.6 billion.

Shifting gears to find growth

More recently, Twitter has announced a string of changes to its platform for users and for advertisers, from a move to monetize logged-out users to a move that allows users to attach more visual content to tweets.

But MoffettNathanson argues that the moves are "too little, too late."

Revenue for the first quarter was up 36%, which was at the low end of the company's guidance. Twitter chalked that up to a lower-than-expected increase in spending from marketers.

Twitter's focus more recently has shifted to video. In an advertising playbook released this spring, the company boasted that it registered a whopping 220 times more video views over the prior year.

But getting a foothold in the video ad market could prove a daunting task, given the swift progress that Facebook has been making in this area.

The question with Twitter is not whether it remains an interesting and relevant platform for its users; it's whether the company can figure out better ways to grow those users, effectively monetize its users, and provide advertisers a strong return on their investment.

Facebook is growing faster, better monetizing the users it has -- at a rate of $11 per year compared to Twitter's $6.70 -- and doing so profitably.

At a time when Facebook is growing ad revenue at 57% and turning $2.2 billion in quarterly profits -- all while investing in its future -- Twitter still seems to be searching for answers as it fumbles along and falls still farther behind.

Is all hope lost for Twitter?

Not exactly. The digital ad landscape is fast-evolving and forever changing, meaning there will always be windows of opportunity for companies to enter with better ways to reach potential customers.

A company can certainly reinvent itself with the right product or service. But Twitter has yet to show us signs that it's about to emerge from this quicksand and establish itself with advertisers.

Until it does, it's tough to argue against MoffettNathanson's grim analysis.

The article Has Twitter Failed, or Is There Reason for Hope? originally appeared on Fool.com.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. John-Erik Koslosky owns shares of Alphabet (A shares), Facebook, and Twitter. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Facebook, and Twitter. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.